In order to ease difficulties caused to taxpayers by the COVID-19 pandemic, on April 8, the Vietnam Prime Minister approved Decree No. 41/2020 / ND-CP ("Decree 41") allowing deferral of tax and land rental payments.
Highlights of Decree 41 and Other Tax Support
The subjects of Decree 41 are specified under Article 2, including enterprises, organizations, household and individual businesses providing consumer staples or those operating in sectors suffering direct and severe impacts of COVID-19 such as agriculture, tourism, transportation, etc. Additionally, the subjects include micro and small-sized businesses and those engaged in the production of prioritized industrial auxiliary products1 and key mechanical products.2
In accordance with this regulation, value added tax (VAT), corporate income tax (CIT) and land rental fees are allowed to be deferred for five months from the standard deadlines. In case the CIT obligation for 2019 has already been settled, taxpayers are allowed to reclassify the paid amount and offset it against other tax obligations. Most deferred tax and land rental fee payments will be due by the end of 2020, which helps ease the stress on short- and mid-term cash flow needs for businesses.
In March, the GDT also issued a decision guiding provincial tax departments to not conduct tax audits on enterprises suffering negative impacts from the pandemic. Tax departments are also instructed to not conduct irregular (unplanned) tax audits, except for peculiar cases.
Potential Risks Associated with the Application of Decree 41
Pursuant to Decree 41, taxpayers are still required to submit tax returns correctly and fully by the stipulated deadlines. Failure to do so will trigger potential administrative penalties.
In addition, companies are required to do a self-assessment on their eligibility and take full responsibility for the application of Decree 41. This means companies' application for payment deferral will likely come into effect automatically upon submission of the application form, and there will be no official notice or confirmation from tax authorities. In addition, tax authorities will have the right to inspect the application of Decree 41 at their convenience, either during the deferral period or later during tax audits. If tax authorities are not convinced that Decree 41 is applicable to a taxpayer, companies will have to meet their tax payment obligations in addition to the late payment interest. They could also be subjected to administrative penalties if the Tax authorities conclude that Decree 41 is not applicable during tax audits. Companies which are under a tax audit plan in 2020 should also expect more severe collection pressure from tax auditors, who could resort to transfer pricing (TP) audits as a means to deem additional tax payable and/or push companies to accept adjustments of other taxes.
Hanoi Tax Department Ruling
Separately, The Hanoi Tax Department also issued Ruling No.28545/CT-TTHT dated 29 April 2020 proposing to the General Tax Department (GDT) some measures to support taxpayers under the Hanoi Tax Department’s administration during the pandemic. Specifically, the ruling proposes that administrative penalties for late submission of tax returns due cannot be imposed as the pandemic is considered a force majeure event. This could either be applicable for all taxpayers in the city for the duration of COVID-19 or for limited taxpayers within quarantined areas or that have key personnel quarantined.
Our recommendations to utilize the support by the government and mitigate risks are:
- Conduct an objective and detailed assessment of your business activities to support the eligibility to apply Decree 41. In case there is not a sufficient basis, we strongly recommend that taxpayers seek opinions and support from their consultants or the tax authority to resolve any concerns. Evidence to support such eligibility should be carefully documented and submitted together with your application form.
- If companies are informed by tax officers that they are to be included in the 2020 tax audit plan, review tax and TP compliance. Companies should pay special attention to supporting documents for related party transactions and have diligent benchmarking studies performed using reliable data sources to use in profit margin negotiation in a TP audit.
- Plan ahead for year-end and long-term cashflow needs since most deferred tax and land rental fees will be due by the end of 2020. If companies conduct major transactions with related parties, it is recommended that they extend payment terms or ask for working capital support from parent entities.
- Consider restructuring the value chain and intra group transactions to minimize any potential disruption in cash flow or supply. However, these restructuring activities need to be scrutinized to avoid potential tax and TP risks to the company or any of its related parties.
1.The full list is presented in the appendix of the Government's Decree No. 111/2015 / ND-CP, dated November 3, 2015
2.The full list of industries and economic sub-sectors is provided in Appendix I, Prime Minister's Decision No. 27/2018 / QD-TTg dated July 6, 2018. Micro and small-sized enterprises are defined in the Law No. 04/2017 / QH14 and Decree No. 39/2018/ND-CP dated March 11, 2018. The list of industrial products of supporting industries prioritized for development is stipulated in the appendix of the Government's Decree No. 111/2015/ND-CP, dated November 3, 2015.